Customer Profitability Analysis

What is a Customer Profitability Analysis?

It is a data-driven approach that identifies which customers create the most value for the company and which potentially cost more to service than they contribute.

Customer profitability analysis differs from traditional sales analysis, which focuses on revenue and gross margin, by including the hidden costs:

Cost of Selling: Time spent on negotiation, travel, and administration.
Cost of Serving (Supply Chain): This is the critical difference. It includes costs for frequent, small orders, special packaging requirements, inventory costs for maintaining a high safety stock for the customer, and expensive logistics solutions.

In short: the analysis measures the real value of the customer relationship by subtracting all resource consumption from the revenue. This provides an honest picture of whether the customer is a profit driver or a cost driver.

What is a Customer Profitability Analysis used for?

The analysis is used to make strategic decisions about customer relationships, service levels, and pricing.

It helps with, among other things:

Differentiated Service Level: Determining which customers should be offered the highest service level (e.g., fast delivery, dedicated inventory) and which should receive a more cost-effective offer.
Pricing and Discounts: Ensuring that pricing reflects the real costs of serving the customer.
Optimization of Sales Effort: Shifting sales resources from non-profitable customers to customers with high potential.
Improve Supply Chain Efficiency: Identifying inefficient processes that drive up costs for specific customer segments (e.g., many small orders).